California's fiscal problems 'dramatically smaller' than recent years

SACRAMENTO -- California will contend with a $1.9 billion budget deficit through mid-2014, but a new infusion of cash from Proposition 30 and a growing economy could put the state back on track shortly thereafter with a surplus for the first time since 2001, the Legislative Analyst's Office said Wednesday.

And if legislators and the governor approach spending cautiously, the Golden State could enjoy surpluses for years to come, said Mac Taylor, the legislative analyst.

"It's a dramatic turnaround," Taylor said. "We've stabilized our problem. Even in the near term, we have small problems relatively speaking."

Taylor wrote that California's continuing economic recovery, prior budget cuts and the passage of Proposition 30 have combined to bring the state to a "promising moment: the possible end of a decade of acute state budget challenges."

The positive news, Taylor said, means that schools, universities and health and social services "won't have to worry about additional program cuts, or at least nothing like we have had to look at in past years."

In its annual budget projection, the state's nonpartisan legislative analyst said the Legislature should begin to have a $1 billion operating surplus in 2014-15, and that could grow to $9 billion by 2017-18 -- thanks in large part to Proposition 30, which will raise income taxes on the wealthy for seven years and the sales tax by one quarter cent for the next four years.

The projections take into account Proposition 30, expected to bring in about $6 billion a year, and Proposition 39, the measure that will raise $1 billion annually by closing a loophole for out-of-state businesses.

The LAO is projecting a $1.9 billion deficit in the near term because revenues came in $625 million less than expected; and the Legislature spent $2.7 billion more than its previous projection. Offsetting the deficit is an accounting fix of $1.4 billion, based on revenues that the Department of Finance said came through various "accrual" procedures.

In total, personal income taxes were $153 million below what the budget assumed. Revenues from Facebook's initial public offering were lower by $626 million than the governor's budget assumed -- $1.25 billion rather than $1.9 billion. But, revenues from non-IPO personal income taxes, higher by $473 million, somewhat made up for the shortfall.

The last time legislators were projected to have a surplus was 2006, but they spent it all and immediately found themselves in a fiscal hole that eventually grew to $42 billion.

"Economic growth began to slow in 2007, and all of these problems got worse," said Ryan Miller, a senior fiscal and policy analyst with the LAO.

Pressures for legislators to restore some of the billions of dollars in cuts, which hit social services hardest, could undermine the progress, Taylor warned.

But the LAO's projection also assumes that the state's economy continues its moderate growth and that President Barack Obama and Congress will negotiate a deficit-reduction package that avoids the so-called fiscal cliff, which experts say could send the country into a recession.

Taylor credited the Legislature for reining in its spending in recent years, and Senate President Pro Tem Darrell Steinberg, D-Sacramento, agreed that lawmakers should be commended for the hard cuts they have made.

Future surpluses, Steinberg said, "opens opportunities to plan for the future." He said he's focused on three goals: to pay down debt, set aside a reserve in case of economic downturns, and "reinvest in public and higher education, health and human services, and public safety."

The last time the LAO projected ongoing surpluses of the kind in this year's outlook was in November 2000, when it said that the state would have a $10.3 billion reserve with multi-billion surpluses for years. But the economy slowed in 2001, the downturn intensified with the Sept. 11 attacks, and the LAO was forecasting a $4.5 billion deficit at the end of 2001-02, with future annual operating deficits growing to $10 billion.